The secret to tackling the defense information technology market may likely be scale.

Looking specifically in the pure-play IT companies, many of whom have doubled down in a few capacity saw defense revenue increase during fiscal 2017. That came on the tail end of some other trend on the list of largest defense primes, to emerge from the IT business.

“The evolution started a couple of years back, the location where the large defense primes who had boned up on IT service work during the war on terror began to understand that to get a selection of reasons they may not be able to compete as effectively, or extract the returns they really want away from a small business prefer that,” said Jon Raviv, senior analyst and second in command for aerospace and defense at Citi Research.

Divestitures followed, and pure-play IT companies could quickly scale up not simply in space in addition to their power to support massive contracts, and also in capability set. The purchase of Lockheed Martin’s IT business transformed Leidos coming from a $5 billion company to your $10 billion company. That deal closed in late 2016, explaining what sort of company saw double-digit growth in defense revenue in both 2016 and 2017, despite the buy actually making the corporation less defense heavy overall.

Similarly, CACI closed on the buying of L3 Technology’s National Security Solutions for $550 million in February 2016, 90 days ahead of the end of the fiscal year. The associated revenue contributed towards the 16 percent surge in defense revenue during 2017.

Leidos CEO Roger Krone told us, right after the acquisition closed, pointed to “scale, although not scale for scale’s sake” as being a big factor in the buy, noting, too, the need for balancing the portfolio and geographic distribution. He also pointed to sheer numbers, 15,000 employees specifically, many with security clearances.

The trend does are continuing. CSRA decided to not participate within the 2018 Top 100 because its $9.7 billion acquisition by General Dynamics closed once data collection for your list began. While General Dynamics is really a top defense prime, its IT business functions as a largely separate entity, like the pure-play IT companies. The acquiring CSRA, which reported $2.25 billion in defense revenue for fiscal 2016, will add significant scale to GDIT. It is also likely to influence the corporation’s Top 100 rank pick up.

The future promises more cyber and IT-related merger and acquisition activity in the vein of the deal, according to Daniel Gouré, a v . p . with the Lexington Institute think tank.

“Raytheon is still in acquisition mode with cyber, so that it’s a location that’s still type of churning,” he explained. “I wouldn’t be surprised to view some of these big players get some good with the more defense-oriented cyber players.”
Unclear ‘s what the sweet spot could possibly be for anyone exclusively IT-focused firms.

“Where we sit today, it’s not yet determined just what the right dimension is,” Raviv said. “GDIT and Leidos are about $10 billion in sales; SAIC and CACI and ManTech are lower tier. All of those companies appear at first sight satisfied with scale but could execute a deal. Whether they refer to it scale, or marrying capability sets, it’s all marketing, I suppose.”

And there are many tactics that achieve scale without acquisition. Perspecta emerged about the 2018 Top 100, having launched June 1, 2018 over the combination of DXC Technology’s U.S. public sector business, Vencore, and KeyPoint Government Solutions. As one entity, Perspecta reported $2.73 billion in defense revenue and ranked 37. To put that in perspective, Vencore ranked 67 in last year’s list, with $886.59 million in defense revenue. And all of these pure-play companies are increasingly marketing themselves as conduits for the “nontraditional players” how the Pentagon is indeed keen to draw in. Amazon Web Services, for instance, will frequently partner with government IT companies on defense contracts handy off some of the contracting morass.

That said, for all your potential, the bulk from the defense IT market is notoriously fickle. Services often put aside IT projects in an effort to preserve platform buys, and margins can be low. Agencies also fight to balance repair off existing systems versus modernization efforts versus research and development in the next great technological marvel.

But as Raviv noted, it’s all IT.

“Yes, you’ll find companies focusing on high-end cyber, the capability to launch attacks through cyberspace or to harden the communication node over a new missile therefore it can’t be hacked by, say, China. And while the saying cyber came up a great deal 3 or 4 years ago, you hear a great deal about AI, autonomy and machine learning. But it’s all technology. And it’s a good deal of smart people implementing a great deal of advanced things a lot of us don’t understand.”